What if we talked about risk in philanthropy?

Tuesday, June 7, 2016

Editor’s note: Laurie Michaels is a philanthropist based in Aspen, Colorado, and the founder of Open Road Alliance, which provides grants to nonprofits for projects facing unexpected roadblocks. Open Road uses several funds at SVCF to execute its grantmaking. This column was written by Ms. Michaels for the Spring 2016 edition of SVCF magazine. Read the full version of SVCF magazine.

Laurie Michaels

In the world of philanthropy, people love telling success stories. We’re less likely to talk about what goes wrong.

But in the nonprofit world, we are actually very vulnerable to real-world risks. What happens when new government regulations halt a fully funded clinical trial? What can a nonprofit organization do when a private donor is tried for embezzlement, threatening a project’s viability? When currency exchange rates fluctuate, and therefore an overseas school project lacks the funds to complete construction, who can help?

Such scenarios are more common than you might think. According to our research at Open Road Alliance, one in five projects requires contingency funding to reach completion on time and with full impact.

Clearly, donors and nonprofits should talk openly and honestly about potential problems early in a partnership, but unfortunately, they rarely do. According to our survey, during the request for proposals (RFP) stage, 76 percent of donors don’t ask what could go wrong. In turn, 47 percent of grantees fear asking for contingency funding even when they really need it because they are afraid doing so will negatively affect future grant requests.

That’s not good business. Conversations about risk and contingencies are a critical part of any business partnership.

In a private construction project, for instance, planners often allow a 10 percent cushion for unforeseen delays or cost overruns. We rarely see that in philanthropy. And it’s not an issue of ability, either. A majority of funders reported that they have the capacity to respond with contingency funds when needed, yet fewer than one in five budget for it at the beginning of a project.

As a donor myself, I started Open Road Alliance to answer a need in the sector. We offer fast, flexible infusions of funds to save projects and/or see them through to completion. If a million-dollar clinical trial for a vaccine suddenly needs $75,000 or it will fall apart, we are able to provide those funds and leverage the original investment. If an after-school program faces an unanticipated glitch that additional money can fix, we are there to help.

Still, we view these solutions as a bandage. The problem runs much deeper. Our goal in the long term is to reduce roadblocks to smart philanthropy and help both funders and nonprofits address potential problems before they occur.

We’re doing so partially through additional research and advocacy, both of which are ongoing efforts. In the meantime, we lean on lessons learned and share better practices with people on both sides of a philanthropic transaction.

Donors and nonprofits need to include in their process a mutual acknowledgment that even the most promising, world-changing project can face complications. With that in mind, donors should ask potential nonprofit partners what those complications might be, and if they have a plan for addressing them. A donor might also consider adding a cushion in the form of contingency funding, taking a cue from the private sector.

In many cases, there’s too much at stake to allow complications to derail a promising project. If a project falls through, sure, it’s a negative for donors. But the weight of the loss falls on people who can least afford to bear it: the nonprofits and the people they serve. Returning to the clinical trial example, if something of that scale fails to deliver results because of an incremental shortfall, people’s health can really suffer.

If smart planning, and perhaps some difficult conversations, at the beginning of a project can ensure success, it’s worth the time and effort. And in the longer term, we all need to rethink the way we approach risk in philanthropic funding.